8/16/2021
Good morning. My name is Zen and I will be your conference operator today. At this time, I would like to welcome everyone to the UWM Holdings Corporation second quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Matt Roslin, you may begin your conference.
I am Matt Roslin, EVP of Legal Affairs and Investor Relations. Thank you for joining us and welcome to the second quarter 2021 earnings call for UWM Holdings Corporation. Before we start, I would like to remind everyone that the conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued this morning. Before introducing Matt, I want to inform everyone on the call that our CFO Tim Forrester cannot be with us today due to personal reasons. Matt Eshbia, Chairman and CEO of UWM Holdings Corporation, United Wholesale Mortgage, will be delivering both the business and the financial updates on today's call.
Thanks, Matt. Appreciate it. And thank you, everyone, for joining the call today. It's great to be here, especially after another outstanding quarter here at UWM. Before we start, I just want to thank our team members here at UWM, our partners throughout America doing great things, mortgage brokers, independents out there. Proud to partner with all of them. The second quarter... was our best quarter in company history from a volume perspective. So we're very excited about the results. Not only do we post record numbers for production, but we almost doubled our prior quarterly production on purchase loans. And that's going to make a big difference as we talk about later on. Purchase production is an important measure. I'm going to explain the details of how we think about it later on in this call. On our last Corey call, as I will do every time, let you know to hold us accountable to our numbers and what we say. We delivered above what we expected in many respects and excited for you guys to see the results and talk about what's going to happen in Q3 as well. We delivered $59.2 billion in production, beating our guidance of $50 to $55 billion. At the time when most of our competitors guided to do less and did less volume, our production was up over 20% at UWM compared to the prior quarter and resulted in an increase in overall mortgage market share by a significant amount at UWM. Our gain margin was 81 basis points in line with guidance and is actually lower numbers than historic year numbers. However, we posted a solid profit. We did over $138.7 million in net income. When I back out the $219 million decline of fair market value of our MSR asset, our core earnings, as I like to call it, was approximately $358 million. That's the way I run the business. I mentally add back or subtract, if it's positive, the change on MSR, really more representative of what our business is. The $358 million we're very proud of, and at the same time, We think of how to run the business to make sure that we deliver great earnings from an operating perspective at all times. And obviously, the MSR asset, we do not control the change in fair values, including impact of certain market assumptions. And to me, when assessing the health of our business, I like to move the changes up or down on a fluctuating asset that I can't control. We've already noted that on a sequential basis, our second quarter results represent a 20-plus percent increase in overall production. I think it was actually 21%. More exciting to me, though, was the 97% increase in purchase production over the first quarter. On a year-over-year perspective, Q2 looks great as well. We had a 90% increase in overall production and a 288% increase in purchase production. There's no mortgage company in America that has comps like this. We are the elite mortgage company in America, and we're proud to show it to you quarter in and quarter out. The second quarter was really interesting as it provided a glimpse into the future to our industry for a couple reasons. First off, the weighted average rate, 30-year interest rate, went to 2.99 from 2.80. So just about a 19-base point raise in rates, and you would have thought the whole industry shut down based on how a lot of people reacted. That was only a small raise in rates. Wait till it goes from 2.99% to 4%, and you'll see the strength of our business across the board. The relative refi mix declined, and purchase increased and became more important for mortgage originators. But purchase mix is not the thing we focus on. We focus on purchase production because purchase mix looks really great if your refi volume went down. UWM's refi volume actually stayed about flat, but we almost doubled our purchase business from $12 billion to $24 billion quarter over quarter. Some companies like to speak about purchase percentage or mix or really don't like to speak about it at all, but it's important to note that the purchase mix can solely change by doing less refinance. And that's really not the story we're trying to tell. We're trying to talk about the strength of our business, which is purchased business. And when rates go from the 2.8%, 2.9% to 3.5% or 4%, that's really when the best mortgage companies will shine. And we believe we are that company. Just like in 2018 or the first quarter of 2020, You know, you can see how people perform when the tide is out and not such frothy business. So second quarter, 24.06 purchase production, our best purchase quarter of all time, our best overall quarter of all time. And if you think about it, if you had no refi business, we'd almost do $100 billion of purchase business in a year, which by far and away would be the number one mortgage company in America. It's very important to understand this because our business-to-business model and history to prove that not only when we gain the purchase share, we retain it and maintain that business with our broker partners and our independent mortgage companies that we partner with. How are we growing in this market? Simple. Speed and service. Our cost structure allows us to be profitable with lower margins, but the reality is we're closing loans faster and more efficiently than anyone in America. Real estate agents love that. Our brokers love that. And that's how we continue to get more referrals and grow our business. Time kills deals, we talk about here at our company. It's never true to run a purchase business. Once a broker closes a purchase loan, they stay with us. They want to continue to send loans to us. And guess what? The realtors want to as well. We continue to close loans in 18 days while the industry is over 47 days. We're substantially faster than the market. Our client service remains best in class with our proprietary technology and uncompromising team members, proving our year-to-date net promoter at a plus 86.6%. While Q2 was a glimpse into the future with rising rates, we've seen rates drop a little bit in Q3, which means a lot of the heavy refi shops, our competitors, will be able to post decent numbers and better gain on sale margins in the third quarter. The reality is Q2 was a glimpse into the future and what this will look like in 2022, 2023, 2024, and UWM is the lead mortgage company. Now, I want to take a quick moment to talk about a quick update on the all-in initiative that we announced on March 4th. A lot of people, a lot of the media, like to spin things and say negative things about the all-in initiative, questioning the decision process. I want to make sure everyone understands that UWM is very in tune with our clients, and it's been an overall huge win not only for UWM, because that wasn't the focus. The focus was on the independent mortgage brokers and consumers. It's been overwhelmingly positive. We are very in tune with what our clients need. And, of course, media and our competitors love to spin the story, but the reality is this. Black and white numbers. UWM grew 21%, $49 to $59 billion, while one of our competitors, who is public, went down from $103 to $83 billion. Or in their partner network, Rocket Mortgage went from $41 billion down to $30 billion. It's not a discussion whether it was successful or not, and other people can spin what they want. It was an overwhelming success, not only because of UWM's growth and some of our competitors' non-growth, if you want to think of it that way, but the reality is this. The alignment of the broker channel from a culture, training, licensing, our clients are all in with UWM, and they're all in for the broker channel just like UWM is. And that day, March 4th, was a changing factor for all the independent mortgage brokers in America. And we're proud to have made that decision. That was very positive for the whole channel and consumers across America. You know, this year will be our seventh consecutive year being the number one overall wholesaler in the country. And we're very excited about the growth and continuing to lead the broker channel as a partner with so many independent mortgage brokers throughout the country. I'd like to summarize some of the production and look back on by saying that a solid foundation, strong and established relationship with our clients, exceptional service position, able to help us capture more market share in 2021 as we just did in the second quarter, but beyond going forward in the future. So we're very proud of where we're at. At the same time, we have a lot of other good things going on. So now let's talk about some other highlights. Return to work. So in June, we welcomed back a lot of our team members. By July 16th, we had all of our team members back here in Pontiac, Michigan. Our culture is more alive than ever. Our 200-acre-plus campus, we're excited to have all 9,000. We have our clients coming in. We have hundreds of clients coming into our office every week, flying to Pontiac, Michigan, to get trained, to get coached, to learn how to grow their business. As they grow, UWM will grow, and the broker channel will grow. And that's a big part of our story, and it's happening every single day. We continue to reinvest in our business and our people. We've built some proprietary technology. We'll save us over $8 million estimated this year on some proprietary things we've done with some docs, document generation and document storage areas that we've done. We've evaluated the feasibility, and we're looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments. That's something that we've been working on, and we're excited that hopefully in Q3 we can actually execute on that before anyone in the country, because we are a leader in technology and innovation. We remain committed to our 9,000 team members. We're creating the best environment for collaboration and learning and growth here at UWM. And in the third quarter, you're going to hear about some game-changing technology and innovation that we are rolling out. We're very excited. It's not things that other people have done. We're trying to be a leader, once again, as we have been for years. And we've got some big things that will be announced in the third quarter. With all that stuff, I'm going to shift, and as Matt mentioned, Tim Forrester, our CFO, cannot be available today for this call, but I will talk about our financials and go through some of the details about our financials before we wrap up and take questions. First thing, I'd like to start about our buyback. As announced in the last quarter, we were authorized by the Board of Directors to buy back shares. The exact details are in our filings, but in the summary, we purchased just under 800,000 shares in Q2. and a lot more since. If you add it all back, we've purchased well more than 2 million shares. And honestly, at these prices, if the float issue wasn't a big deal, we could even buy more. And we have the authority to buy more, and we'll continue to look at it. But we are obviously very aware of our investors' concern about our float, and that's why we can't buy even more shares back at this time. However, we do have the ability to do so, and we'll continue to do so when that opportunity is there. Q2 highlights, net revenue $485 million, comparable quarter of $831 million last year. Remember, $219 million of that reduction was related to a change in our accounting for MSRs, which placed reduction in fair value of MSR within revenue rather than expense. So it's really a $219 million difference there to change. Our servicing income was higher due to our growing portfolio and interest rates. income that followed our overall production volume increasing substantially over prior periods. On liquidity front, cash and cash equivalents remained over a billion dollars, which is significantly more than we operated in prior years. Mortgage loans at fair value from $7.9 billion at the year end to $12.4 billion at June 30th. This increase is due to the overall production, our entry into the PLS market, to garner better execution in certain instances than selling through agencies, as well as renewal of our jumbo loan program, which has been a huge success, doing about $2 billion plus of that production per month. Loans sold through private markets remain on the balance sheets a bit longer than we sell to agencies, but the loans remain fully hedged and are readily marketable, so we do not believe this increased our risk profile in any way materially. And an added benefit increased our net interest income, which is something you can see in Q2 compared to prior quarters. The fair value of our MSR increased from roughly $1.75 billion to $2.66 billion, as the unpaid principal balance increased from $188.3 billion to $260.3 billion at June 30th. The weighted average note rate on our mortgage service portfolio is 2.97%, as evidenced by the fact that in the last 18 months, Utah has originated over $290 billion. It's a very young book from a seasoning perspective. Credit quality is quite strong. Delinquency rates over 60 days is 1.18% down from 1.93%. In our prior call, we noted extinguish our MSR line credit and the encumbrance of MSRs, as well as issue debt to further support our investment in the business. The board of directors has approved and authorized a quarterly dividend of $0.10 per share of common A stock to shareholders of record closing business September 10th to be paid on October 6th. Our costs per loan improved to about $1,490 from 1662. This is such a key data point that people don't want to talk about, but that's 43 basis points. So when we talk about our gain on sale of 81 and our cost is around 43 base points, we can win and be profitable in all markets. These are all-time low margins, basically. And we are very profitable across the board. And with our cost to originate and our proprietary technology, we're going to continue to win with our costs. And we can continue to put pressure on all of our competition, as you saw in the second quarter, as most of our competitors went down in volume. And at the same time, some of them lost money. We succeeded and excelled because of our cost to originate and our proprietary technology. Last quarter we set guidance and did we not only set it, we set a higher guidance and we beat it across the board. We realized record-breaking numbers at UWM and we're very proud of it. The solid foundation we put in place It's producing exceptional results. Our technology platform, our operations, our team members, and what we're doing in the community, we're very, very proud of what we're doing. Liquidity is strong. The broker channel is strong, and it's getting stronger. And UWM is going to continue to get stronger as we continue to make a big impact on the broker channel and all the consumers they serve, and the realtors for that matter as well. One of the last points I wanted to leave you with is, you know, we were very, very profitable in one of the toughest market environments, trough margins, everyone else struggling. UWM, we won, and we're going to continue to win here at UWM. We're looking ahead, and we're going to guide to $57 to $62 billion from a production perspective and gain margins between 75 and 100 base points.
we're excited about the third quarter and i'm excited to take questions so i'm going to turn it back over to you guys and take any questions you have about uwm and our second quarter results or how we see the mortgage market playing out going forward at this time i would like to remind everyone in order to ask a question press star then the number one on your telephone keypad we'll pause for just a moment to compile the q a roster Your first question comes from the line of Steve Delaney of JMP Securities LLC.
Thanks. Good afternoon, everyone, and congratulations to management on either beating or meeting your May 11th guidance for the quarter. Very strong. Matt, I say that for one reason, in that we heard a lot of – we didn't get a lot of clarity, but we heard there was a lot going on at the GSEs in terms of, I guess you could call it pricing actions or capital markets changes. It obviously had less impact on you than it had on others, it would appear. But could you share with us – just generally what was going on there. And what I guess we really need to know is how much of this was a one-time pipeline impact and how much of this may be ongoing in terms of, you know, constricting the volume of business you do with Freddie and Fannie. Thank you.
Yeah, thanks for the question. You know, first off, so everyone knows, Tim Forster will be available for any questions this week, next week. If there's any follow-up questions that I can't handle financially or you want to hear his perspective, he's available for you. So he's always available. But to answer your question specifically, you know, obviously, you know, I know other companies have spoke about some changes. And, you know, we kind of look at those changes and see that that happens frequently. You know, from Fannie Mae and Freddie Mac, I can't control what Fannie Mae and Freddie Mac do and how that impacts our business. And sometimes there's things that happen and it's retroactive. There will also be some things that are retroactive in a positive way also sometimes. And so there's gives and takes in it in a positive way. What I think the most important thing that's happening on this so that you won't see these types of things from some of our competitors or really with us at all, obviously we're prepared to be profitable really in all situations. I talked about our costs originate. But even on a compressed gain on sale quarter like this one, the reality is this. You know, the wholesale market is becoming more and more known as quality, strong lenders, opportunity for growth, and the best way for a consumer to get a mortgage. And so with that being said, we think a lot of the legacy, if that's the right way, legacy mindset around wholesale or around brokers or around some of the pricing actions that some of these places take are going to be a thing of the past and the very near future. Now, does that mean it's going to happen in the third quarter? I don't know, but we do know that the markets are adjusting to that the best way to get a mortgage is through a wholesale lender, through an independent mortgage broker, and the quality and all the other aspects of a mortgage process. And that's why so many people are trying to join in the wholesale channel, because it's such a strong channel. Everyone sees the mortgage brokers as the future of the industry. And so some of the legacy rules and some of the things the other lenders have talked about that the GFCs might have imposed, I think those are short-term, and I think one day we'll be talking on a quarter where they got reversed, and all of a sudden we picked up some money in our positive way, and that will happen then, too.
Well, definitely doesn't sound like they put you on defense, that's for sure. Whatever they did, and I guess we'll hear about all that over time, but just keep moving it forward. I like that. Hey, look. Just a quick follow-up and a comment. Thanks for including the third quarter dividend in the press release, $0.40 a year. That's a nice 5% yield on where the stock is trading today, and I think it will keep some people interested. So, look, it's a little – I'll let others talk maybe more about the buyback, but it's somewhat – not completely unusual for a company to be paying a cash dividend and also buying back shares. But on the one hand, I was a little concerned that maybe the board would change its view on the dividend and to allocate more capital to shares. Do you think it's possible? I guess the board will make a decision every quarter, but at least in this quarter, for the third quarter, it looks like the board is doing both, paying the dividend and buying back shares. Is that a fair assessment?
That's fair, and I don't, you know, as the chairman of the board, you know, at this point, I don't see a reason that we would not pay the dividend. A dividend is a way to repay our shareholders, and I plan on that going forward. Obviously, we have to vote on it and talk about it every single meeting, but there's no inclination, there was no discussion or any concern about continuing it forward. The buyback was approved for $300 million, and we have 24 months to execute on it. We executed a good amount on it, and once again, if the float was larger... I would be taking a lot more advantage of it because the share price is at right now, with the dividend, it's a ridiculously high yield, as you're well aware of. And we're happy to reward our loyal shareholders that way, and we're going to continue to do so going forward.
Thanks for the comments, Matt.
Thank you.
Next question comes from the line of Henry J. Coffey, Jr. of Redbush.
Good afternoon, and thank you for taking my call. And if we're collecting votes here, given how your stock is trading relative to the book and given the float challenges, I think the dividend is a terrific way to return capital. It's one of the more attractive aspects of the UWM fee shares. So if you're taking votes, I vote in favor of the dividend. On a highly technical area.
I agree with you, Henry, and I'm a large shareholder, too, so we're on the same team, me and you.
Right. You get to vote more than I do, sir. Small item, and we can get into this offline if it's – but in March, your G&A expense was $16.8 million, and then in June it was $42.1. Even though overall expenses were lower than we expected, I was just wondering what that one item was all about.
I think we can go offline on it, but it was just a reversal in the first quarter. So 42 was aligned with it. Our expenses actually went down, as you saw. We just had a reversal in the Q1 of about $20 million, if I remember correctly, which puts us around $36, $37 on that same line item. So it was basically apples to apples, and our overall expenses have gone down, and that's why our costs originate and has gone down as well.
That was very obvious. All the other numbers moved in the other direction, and I was just curious about that one, but thank you.
Yeah, Q1 was a one-time out-of-period reversal of a contingency, and Q2 there was a $5 million added, but when you net out, that line item is basically flat.
Cool. Thank you. On a more interesting topic, you made a comment in the press release in the second quarter. We began seeing the return from the foundation we built, particularly growth in purchase production and also renewed focus on jumbo, FHA, or government lending, and manufactured housing. I was wondering if you could tell us a little bit about two of those legs, the jumbo business, which I'm assuming is more of a PLS securitization, and then the manufactured housing lending, which is an area that's been really quiet for some time.
Yeah, so we're looking at a way to continue to help our clients serve their clients. And so the Jumbo product has been a huge success. We rolled it out. I think I announced that it came out March 17th. So really, we didn't really get a full quarter of it because, you know, you don't really close loans until the middle to end of April on it. But we did, on average, I think in the second quarter, about $2 billion in a month of that product. So just under $6 billion. I think it's $5.9 billion off the top of my head in those three months and growing in July. And so we feel really good about that product. The nice part about that product is it wasn't quite 50%, but it was almost 50% purchase. And so we talked about how it's going to be a big purchase product as well, just like FHA and just like manufactured homes. It's a much smaller product, but it's a nice way to take care of all consumers. Equitable housing is a big focus of ours and how we continue to do good things. throughout the country. And quite honestly, a lot of our brokers, they just want to use UWM. They want to have the consistency of our process and submit their loans to UWM. And so when they have the confidence that Jumbo comes to UWM, their FHA do, their VA, of course, their conventional loans do. They have the consistency that when a realtor brings them a loan and a transaction, they know we can come in and out and close in 10, 12, 15, 20 days with UWM. And so we rounded out our products a little bit. We obviously had our all-time record quarter of 59% $1.2 billion. And we're going to have our biggest year in company history by a lot as well. And so the growth at UWM is not slowing down. And once again, rates just ticked up a tad bit, and everybody else fell off, and we grew. Wait till rates tick up a half point or a point, and you'll see the value of these products along with our purchase focus. And UWM will not only become the number one overall lender, but will continue to show great market share gains and a lot of great returns to our investors.
Given our housing group is very bullish on manufactured housing because of the role it plays in affordable housing and the ability to give someone a house with a yard and security, I know Fannie has been a lender somewhat Freddie Mac hesitant. Can you tell us from your own perspective what's going on with the GSEs and manufactured housing and what role United will be playing in that going forward?
Yeah, you know, we're working with the GFCs on the product. We're going to continue to offer the product to hopefully make, you know, affordable housing more available to more and more people. And we think manufactured homes aren't going to become less of the market. They're only going to become more of the market. So we figured we'd get into it, make it good. end roads in it, make sure our processes are tight. And we actually had a lot of success in the, we just rolled it out in mid-April. So it's still very new from a perspective of our business, but you'll see more of it in the third quarter and more going forward as, you know, our commitment to equitable and affordable homes throughout America.
The gain on sale margin competition, primary and secondary spreads have actually improved and reasonably stable in July. We don't quite know what to expect for August, but can you give us a sense of what the competitive environment looks like in August on the gain front?
Yeah, so we're looking at our competition and we're continuing to monitor everyone. But the reality is we feel that we guided in a really good place. We feel really comfortable with where margins are. We can play in a place that other places can't based on our cost to originate. We feel really good about the guidance I've given you guys along with on both the volume and gain on sale numbers. And so I don't think it's becoming more competitive or less competitive. I think You know, the market is what the market is, and we obviously are the leader, which drive a lot of that volume and margin compression or increase. And so we're controlling it. We feel really good about where we're at, and we're highly profitable. You know, the way I look at it is, you know, You know, on our core earnings, we made over $350 million in the quarter, grew our market share substantially, grew 21%, gained $10 billion of volume, and all of our main competitors went down. And so I feel really good about where everything's at. You know, we can make $300 million, $400 million in core earnings in a quarter, and I feel really good about where we're at. And then when the big opportunities come to make a little more margin, you'll see the huge numbers that you saw the last couple quarters before this.
Well, thank you and congratulations on a solid quarter.
Thank you.
Next question comes from the line of Doug Harter of Credit Suisse. Your line is open.
Thanks. I'm hoping you could talk a little bit about, you know, kind of how sticky you think some of these market share gains are. will be following the all-in and kind of the need or desire to kind of keep some of the price match promotions, for lack of a better word, that you've been running?
Yeah, so it's extremely sticky. The loyalty on the all-in is black and white. That's not even whether it's sticky or not. Those people are all-in for the broker channel, which includes UWM and doesn't include two lenders, which we pointed out that we're not doing the right things for wholesale brokers, and so we made that stance. But the stickiness has been significant there with our clients. The growth has been significant with our clients. And quite honestly, it's just alignment across the board where, hey, if you're all in for the broker channel, we're going to help you continue to grow. We're going to give you trainings. We're going to help you build your business, help you with all aspects of your business to grow and succeed. And that's what's working. And those clients are growing faster than the rest of the clients in the country. And so we had a very few amount that weren't in the all-in mentality. And that's perfectly fine. But the great, great majority of all independent mortgage companies are And that's why we've grown and we will continue to grow as their partner going forward. And so that's a big part of it. And so how the stickiness, you know, the price match and talking about those things, those things aren't really driving volume. Those things are more of a confidence and explanation for our clients to say, feel confident. UWM's price is great. Our products are great. Our service is the best. Our technology is the best. Our partnership is the best. Let's continue to work with UWM, and we can help you grow your business. And it's not only resonated with them, it's been overwhelmingly positive where they understand it, and they're all in with us, and we're helping them grow. And so our price is very sharp. Do I have to continue with price matching? Those things are very, very nominal amounts, because quite honestly, you saw our margins. Our margins are pretty good. Our price is already really good. And so we're going to continue to be aggressive with growing the broker channel because it's best for consumers, it's best for the brokers, and it's best for UWM. And our market share gains were substantial, seeing, you know, I think we were in the first quarter, we were $54 billion out of the number one spot, and now we're $24 billion out of the number one spot. So a $30 billion closing of the gap in one quarter wasn't so bad. Imagine if rates went up to three and a half or four. You'll see a whole different game very soon.
And then just Following up on kind of the margin outlook, you know, I guess what type of environment do you need to see to kind of go from kind of the 2Q81 basis points towards the upper end of the guidance range of 110 basis points?
Yeah, I think we guided to 100, so 80 to 100. And so I think, you know, do I think it will be 81 again? No, that's why, you know, I think we got it 75 to 100, actually. But I think, you know, I don't see margins going down. However, I don't see them going up much either. And so the reality is this. margins are going to be in the range that we gave for this quarter. And I think I told you guys last quarter that I believe it's between three and six quarters it could be at these all-time lows. But it's not going to stay down here very long. And when you see the overall year, averaging in the first quarter along with second, third, and fourth, it will be on the lower end of normalized but not as low as you see right now. And I don't think there's that far off until the opportunity comes back to where it gets back to more normalized, which is our you know, low to mid-100 numbers, but it's not going to happen in the third quarter, and I don't foresee it happening in the fourth quarter. And so, there's a lot of dynamics that go into how we price and how we think about it, and what we think will be the best way to deliver value to our shareholders, while at the same time taking on market share and continue to grow and meet the vision and the goals of our company.
Thank you, Matt.